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The Ups and Downs of the S&P 500

The S&P 500 is the Wall Street equivalent of the VIP list—being included signals prestige, financial clout, and investor confidence. But not every company can keep its place on this elite roster. With the average lifespan of an S&P 500 company clocking in at just 21 years, the reality is stark: what goes up often comes down.

When a company gets booted from the index, the ripple effects are swift and far-reaching. From plunging stock prices to shaken investor sentiment, the aftermath can feel like a financial earthquake. So, what triggers a delisting, and what does it mean for everyone involved? Let’s dive in.

Key Takeaways

• Being in the S&P 500 elevates a company’s profile, often boosting its stock price and attracting more investors.
• Removal typically triggers an immediate stock price drop due to lower demand and reduced visibility.
• Companies leave the index either voluntarily (e.g., mergers or going private) or involuntarily (e.g., failing to meet financial criteria).
• For investors, delisting may mean less liquidity and a tough decision: hold or sell?

The S&P 500: A Financial Powerhouse

The Standard & Poor’s 500, better known as the S&P 500, tracks the performance of 500 of the largest publicly traded companies in the U.S. It’s a bellwether for the economy and a vital benchmark for investors.

From tech titans like Apple and Microsoft to healthcare giants like Eli Lilly, the index hosts a who’s who of industry leaders. But inclusion isn’t guaranteed—companies must meet strict criteria to join and stay in this exclusive club.

What Does It Take to Stay in the S&P 500?

To secure a spot on the S&P 500, a company must hit the following benchmarks:

• Market Cap: At least $18 billion.
• Liquidity: Adequate trading volume and public float (minimum 10% of shares available to the public).
• Profitability: Positive earnings over the last four quarters.
• Domicile: Must be a U.S.-based company.
• Sector Balance: Must contribute to the index’s sector diversity.

Even meeting all these criteria doesn’t guarantee a spot—an S&P committee evaluates companies quarterly to decide who’s in and who’s out.

Why Companies Are Dropped

Companies are removed from the S&P 500 for various reasons, which fall into two main categories:

Voluntary Delisting

• Going Private: For example, Dell Technologies left in 2013 to go private, only to return in 2024.
• Mergers/Acquisitions: Merged companies often cease to exist as standalone entities.
• Cost Savings: Staying in the index can be expensive and demanding.

Involuntary Delisting

• Market Cap Decline: Falling below the $18 billion threshold.
• Liquidity Issues: Insufficient trading volume.
• Financial Woes: Chronic losses or looming bankruptcy.
• Regulatory Noncompliance: Failure to meet SEC or exchange requirements.

What Happens to Stocks When They’re Removed?

When a company is shown the door, the consequences are immediate:

For the Stock

• Short-Term: Stock prices often take a nosedive as index funds unload shares. Liquidity dries up, and negative sentiment clouds the company’s outlook.
• Long-Term: Reduced institutional ownership and analyst coverage may exacerbate challenges, though some companies use delisting as a wake-up call to restructure.

For Investors

• Hold or Sell? The decision hinges on whether you believe in the company’s long-term potential.
• Portfolio Rebalancing: Index trackers must sell the delisted stock and purchase its replacement.
• Liquidity Issues: Trading the stock becomes trickier and potentially costlier.

Companies Dropped From the S&P 500 in 2024

This year, several household names found themselves on the chopping block:

Whirlpool Corporation

• Why It Was Dropped: Declining market cap and underperformance.
• Impact: Shares hit a 52-week low; transitioned to the S&P MidCap 400.

American Airlines

• Why It Was Dropped: High debt levels and poor profitability.
• Impact: Stocks sank to multi-year lows as investors soured on the airline sector.

Etsy

• Why It Was Dropped: Post-pandemic growth slowdown and fierce competition.
• Impact: Reduced visibility and questions about its long-term viability.

On the Flip Side: Companies Added in 2024

Where there are removals, there are additions. This year’s newcomers include:

• Palantir Technologies
• Dell Technologies (back after a decade!)
• CrowdStrike Holdings
• Super Micro Computer Inc.

These companies now enjoy the perks of S&P 500 membership: increased visibility, boosted liquidity, and a vote of confidence from investors.

The Bottom Line

Getting delisted from the S&P 500 can feel like a blow, but it’s not the end of the road. While some companies struggle, others use it as an opportunity to reinvent themselves.

For investors, it’s a reminder to focus on the fundamentals. A stock’s inclusion—or exclusion—shouldn’t be the sole driver of investment decisions. After all, the market is always evolving, and today’s losers could be tomorrow’s comeback stories.